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October 27, 2009

Don't Panic

The action in precious metals this week, particularly that of silver, no doubt has some long-side traders munching on fingernails. After all, both gold and silver formed what looked like continuation pennants and then broke lower rather than higher. However, for a precious metals bull (as opposed to trader), nothing could be sweeter than this pull-back. The culprit for the weakness is the dollar, which appears to have finally embarked on the long-awaited counter-trend rally. The end of the buck's rally will mark the beginning of the next rally in PMs... and what a doozie of a rally I expect it to be.

In the meantime, we could be in for a little bounce:

gold miners

bank stock index chart

The $164M in buying-on-weakness posted today lends credence to a bounce, as well. Now, whether any bounce is sustainable will ultimately depend on the dollar's action. Unless the DX presently losses the 76 pivot, I'm going to assume a larger counter-trend rally is still on. In fact, a larger correction in equities would play well into our thesis that a pop in the buck will lead into an explosive move in metals. Can you imagine how the Fed would panic if the DX approached 80 again? Or if banking stocks fell 20%? They would oil the presses and juice gold straight to $1,800.

So, bring on those lower prices. For those of us with firing power and patience, a slow retreat over the next few weeks will be gold, so to speak. Big piles of it. In the meantime, the infinitely wise words of Douglas Adams can serve as guidance: don't panic.


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